India-Pakistan: The MFN-NDMARB Debacle

16 Jun, 2014    ·   4515

Sushant Sareen writes why trade negotiations between India and Pakistan will now have to be started from the scratch

In the irrational exuberance that is invariably on display in the media every time leaders of India and Pakistan meet, the subtlety of some of the signals that are sent out is often lost. Something similar happened after the Indian Foreign Secretary briefed the media about the meeting between Prime Minister Narendra Modi with his Pakistani counterpart who, along with other South Asian leaders, had been invited to the swearing-in ceremony of the new Indian government. The media latched on to the words ‘the two countries could move immediately towards full trade normalisation…’ and went overboard in talking about the prospects of Indo-Pak trade taking-off. But in the process they missed the significant rider that India had put, viz. ‘…on the basis of the September 2012 roadmap’. This rider effectively reopens the entire trade deal between India and Pakistan and nullifies the agreement that had been reached between the Manmohan Singh government and Nawaz Sharif government in February 2014. The message that the Modi government seemed to be sending was that it will not accept the constant shifting of the goalposts on the trade issue by Pakistan.

The first big breakthrough on the trade front came in 2011 after India withdrew its objection to the trade concessions offered by the EU to Pakistan as part of an aid package to help Pakistan get over the damage caused by the 2010 mega-flood.

Apparently, India’s ‘gesture’ was part of a back room deal with Pakistan which, in return for India withdrawing its objections at WTO, agreed to a roadmap to open trade and grant India the Most Favoured Nation (MFN) status in a time-bound manner. The way India looked at it, the damage caused to India’s exports by the EU package for Pakistan would be adequately compensated, both politically and economically, by the fillip that India-Pakistan trade would receive as a result of a trade agreement between the two countries. 

Following negotiations between the then Pakistan People’s Party-led government in Pakistan and the United Progressive Alliance-2 government in India, a roadmap was agreed in 2012. Under this roadmap, in a time bound manner Pakistan would first replace the positive list of tradable items with a negative list. This would be followed by according full MFN status to India. Some items would remain on the sensitive list and this list would steadily be pared down. Pakistan’s concerns about non-tariff barriers and trade access were also addressed and three trade-related agreements were struck. But Pakistan reneged on the roadmap and apart from replacing the positive list with a negative list, there was no further movement.

After the Nawaz Sharif government assumed office, a new round of negotiations commenced between the two countries. By February 2014, a new deal was worked out which significantly altered the terms of trade engagement. Instead of the MFN status, Pakistan now offered a ‘Non-Discriminatory Market Access on Reciprocal Basis’ (NDMARB). While this new arrangement gave everything that India would get under MFN, it was not quite MFN. This was a bilateral trading arrangement as opposed to MFN which is a multilateral arrangement under the WTO. Because this was a bilateral arrangement, Pakistan was free to walk out of it if it felt it did not serve its interests or if the gains it anticipated from trading with India were not according to expectation. Pakistan’s commerce minister said so in a number of interviews he gave after striking this agreement with his then Indian counterpart, Anand Sharma. Since it was a bilateral arrangement, the dispute resolution mechanism under this arrangement would not be under WTO rules, which in turn meant that whims and fancies of Pakistan's real rulers (who thankfully scuttled this deal) would continue to impinge and impose themselves on the bilateral trade. 

Frankly, the February 2014 deal was an unequal bargain loaded almost entirely in Pakistan’s favour. Sectors in which India enjoyed a comparative advantage were blocked while those which were of interest to Pakistan were made part of the deal. There was no give by Pakistan on other issues of interest to India, such as transit rights to Afghanistan and beyond. While Pakistan agreed to opening up trade via Wagah, this again served Pakistan more than India. After all, if Pakistan expected to increase its exports to India by an estimated $ 2 billion and wanted its Punjab to benefit from trade with India, then opening Wagah was a no brainer. Additionally, Pakistan wanted India to open banking channels and liberalise visas but was unwilling to address India’s serious concerns on export of terrorism into India. The unkindest cut of all was that, in spite of the fact that on practically every issue, it was India and not Pakistan that has made concessions, Pakistan waved the trade deal as a major concession that they have given to India to kick-start the normalisation process! 

While negotiating the trade deal with Pakistan, the India probably forgot that political or diplomatic dividend that accrues on account of trade between two countries that don’t share the best of relations is, or should be, at best a by-product and not the primary motive of normalising trade. When concessions are given which tend to introduce distortions by undermining the comparative and competitive advantage of one country to protect the inefficient sectors of another country then the logic of trade is turned on its head. India's biggest is that it mixed politics with trade; and that was hardly a sensible thing to do especially since the political benefit remained iffy and the trade benefit was marginal. Even if trade with Pakistan increased by 100%, it would be less than 1% of India’s total foreign trade. Fortunately, despite the extremely favourable terms offered by India, the Pakistan army prevented the Nawaz Sharif government from grabbing the deal.

With a new government in India, it appears that the best possible deal that Pakistani could get is no longer on offer, and trade negotiations will have to restart, practically from square one.